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The Future of Long-Term LNG Contracts

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  • Hartley, Peter R.

    (Rice University and University of Western Australia)

Abstract

Long-term contracts between exporters and importers of LNG increase the debt capacity of large, long-lived, capital investments by reducing cash flow variability. However, long-term contracts also may limit the ability of the contracting parties to take advantage of profitable ephemeral trading opportunities. After developing a model that illustrates these trade-offs, we argue that increased LNG market liquidity is likely to encourage much greater volume and destination flexibility in contracts and increased reliance on short-term and spot market trades. These changes would, in turn, reinforce the initial increase in market liquidity.

Suggested Citation

  • Hartley, Peter R., 2014. "The Future of Long-Term LNG Contracts," Working Papers 14-022, Rice University, Department of Economics.
    • Handle: RePEc:ecl:riceco:14-022
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    File URL: http://economics.rice.edu/rise/working-papers/future-long-term-lng-contracts
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    References listed on IDEAS

    as
    1. Christian Hirschhausen & Anne Neumann, 2008. "Long-Term Contracts and Asset Specificity Revisited: An Empirical Analysis of Producer–Importer Relations in the Natural Gas Industry," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 32(2), pages 131-143, March.
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    Cited by:

    1. Baba, Amina & Creti, Anna & Massol, Olivier, 2020. "What can be learned from the free destination option in the LNG imbroglio?," Energy Economics, Elsevier, vol. 89(C).
    2. Amina Baba & Anna Creti & Olivier Massol, 2020. "What can we Learn from the Free Destination Option in the LNG Imbroglio ?," Working Papers hal-03181028, HAL.
    3. Abdullahi Alim & Peter R. Hartley & Yihui Lan, 2018. "Asian Spot Prices for LNG and other Energy Commodities," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    4. Øglend, Atle & Osmundsen, Petter & Kleppe, Tore Selland, 2015. "Trade with Endogenous Transportation Costs: The Value of LNG Exports," UiS Working Papers in Economics and Finance 2015/5, University of Stavanger.
    5. Chyong, C-K., 2019. "Challenges to the Future of European Single Market in Natural Gas," Cambridge Working Papers in Economics 1918, Faculty of Economics, University of Cambridge.
    6. Sophia Rüster, 2015. "Financing LNG Projects and the Role of Long-Term Sales-and-Purchase Agreements," Discussion Papers of DIW Berlin 1441, DIW Berlin, German Institute for Economic Research.
    7. Hendalianpour, Ayad & Liu, Peide & Amirghodsi, Sirous & Hamzehlou, Mohammad, 2022. "Designing a System Dynamics model to simulate criteria affecting oil and gas development contracts," Resources Policy, Elsevier, vol. 78(C).
    8. Vitor Miguel Ribeiro & Gustavo Soutinho & Isabel Soares, 2023. "Natural Gas Prices in the Framework of European Union’s Energy Transition: Assessing Evolution and Drivers," Energies, MDPI, vol. 16(4), pages 1-46, February.
    9. Juhan Kim & Jinsoo Kim, 2018. "Optimal Portfolio for LNG Importation in Korea Using a Two-Step Portfolio Model and a Fuzzy Analytic Hierarchy Process," Energies, MDPI, vol. 11(11), pages 1-18, November.
    10. Omoregie, Uyiosa, 2019. "Value Creation in a 'Non-Producing' Enterprise," SocArXiv h2mv3, Center for Open Science.
    11. Chi Kong Chyong, 2019. "European Natural Gas Markets: Taking Stock and Looking Forward," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 55(1), pages 89-109, August.
    12. Chi-Kong Chyong, 2015. "Markets and long-term contracts: The case of Russian gas supplies to Europe," Cambridge Working Papers in Economics 1542, Faculty of Economics, University of Cambridge.
    13. Hamed Nikhalat-Jahromi & Panagiotis Angeloudis & Michael G H Bell & Robert A Cochrane, 2017. "Global LNG trade: A comprehensive up to date analysis," Maritime Economics & Logistics, Palgrave Macmillan;International Association of Maritime Economists (IAME), vol. 19(1), pages 160-181, March.
    14. Anne Neumann & Sophia Rüster & Christian von Hirschhausen, 2015. "Long-Term Contracts in the Natural Gas Industry: Literature Survey and Data on 426 Contracts (1965-2014)," Data Documentation 77, DIW Berlin, German Institute for Economic Research.
    15. Oglend, Atle & Kleppe, Tore Selland & Osmundsen, Petter, 2016. "Trade with endogenous transportation costs: The case of liquefied natural gas," Energy Economics, Elsevier, vol. 59(C), pages 138-148.
    16. Hupka, Yuri & Popova, Ivilina & Simkins, Betty & Lee, Thomas, 2023. "A review of the literature on LNG: Hubs development, market integration, and price discovery," Journal of Commodity Markets, Elsevier, vol. 31(C).
    17. Sangseop Lim & Chang-hee Lee & Won-Ju Lee & Junghwan Choi & Dongho Jung & Younghun Jeon, 2022. "Valuation of the Extension Option in Time Charter Contracts in the LNG Market," Energies, MDPI, vol. 15(18), pages 1-14, September.
    18. Nikhalat-Jahromi, Hamed & Bell, Michael G.H. & Fontes, Dalila B.M.M. & Cochrane, Robert A. & Angeloudis, Panagiotis, 2016. "Spot sale of uncommitted LNG from Middle East: Japan or the UK?," Energy Policy, Elsevier, vol. 96(C), pages 717-725.
    19. Cho, Jaeyoung & Lim, Gino J. & Kim, Seon Jin & Biobaku, Taofeek, 2018. "Liquefied natural gas inventory routing problem under uncertain weather conditions," International Journal of Production Economics, Elsevier, vol. 204(C), pages 18-29.

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    JEL classification:

    • F0 - International Economics - - General

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